Change is Coming at the FTC, but What Will it Mean for SEPs?: The commission has been a hotbed of litigation, but that may be about to change

And then there were two. With the departure of Commissioner Edith Ramirez, only two commissioners (of a potential five) will remain at the US Federal Trade Commission (FTC). One is a Republican, Acting Chairperson Maureen Ohlhausen, and one is a Democrat, Commissioner Terrell McSweeny. Often their views on competition and consumer protection issues are aligned. But as to how to address abusive standard essential patent (SEP) royalties and the role the FTC should play in that realm, they are diametrically opposed.

This creates an interesting dynamic that could signal an enforcement shift at this intersection of IP, antitrust, consumer protection and contract law.[1] In the current FTC landscape (once Commissioner Ramirez departs and before anyone else is appointed commissioner), it will take two to tango. Given the remaining commissioners’ polar stances on the subject, needing two to tango likely means inaction in the near-term on the issue of SEP abuses. Moreover, assuming vacancies at the FTC are filled with individuals who approach the issue from the same mindset as Acting Chair Ohlhausen (which seems likely in a Republican administration), government enforcement in the space may swing away from intervention toward inaction. That leaves enforcement in the hands of the private sector as well as the remaining international enforcement community.

Background

It is without argument that patents confer a monopoly position upon their holder, and that customers face the prospect of higher prices during the pendency of the patent. The benefit in theory is that by enabling inventors to obtain a monopoly position, patents create an incentive for further innovation, which in turn benefits consumers in the long term.

But there are plenty of hotly contested issues. For example, when a patent becomes part of a standard (in part based on the commitment of the patent holder to license patents on a fair and reasonable non-discriminatory (FRAND) basis, should the patent holder be able to entrench its monopoly position by foregoing its commitment to license on FRAND terms?[2]

And a corollary to that debate is whether the FTC, which is the enforcer of the consumer protection and antitrust laws in the United States, should be intervening on this issue to benefit customers and consumers.

The FTC’s Prior Interventions

Over the past decade, the FTC has had a consistent message for SEP holders that abuse their position and seek excessive royalties – that is, royalties not in line with the SEP holder’s commitment to the standard-setting organization. The message is that doing so violates Section 5 of the FTC Act as well as other antitrust statutes.

In testimony before Congress, the FTC identified the problem as follows: “A SEP holder can use the leverage it may acquire as a result of the standard-setting process to negotiate higher royalty rates or other favorable terms after the standard is adopted than it could have credibly demanded beforehand.”[3] As the FTC further explained, “Hold-up and the threat of hold-up can deter innovation by increasing costs and uncertainty for industry participants, including other patent holders.”[4] As a result, hold up “can raise prices to consumers, distort incentives to innovate, and undermine the standard-setting process.”[5]

The FTC has consistently held the line that the intellectual property and antitrust laws “share the fundamental goals of promoting innovation and consumer welfare.”[6] And, when the balance is unequal, it has prosecuted abuses of SEP rights under Section 5 of the FTC Act (among other statutes).[7] For example, in its case against Google, the FTC alleged that the company, through its subsidiary Motorola Mobility, sought to protect its market power by refusing to license its SEPs on reasonable terms in violation of Section 5.[8] Similarly in the Bosch matter, the FTC alleged that, in violation of Section 5, Robert Bosch GmbH refused to license its SEPs on reasonable terms after committing to the standard-setting organization to do so.[9] In both cases, the FTC settled the matter with a consent order prohibiting such conduct.

In these cases, the FTC espoused the belief that “breach of a FRAND commitment risks substantial harm to the competitive process and consumers” and that the agency was justified in using its authority to prevent such competitive harms.[10] The FTC determined that enforcement was “well within [its] Section 5 authority, which both Congress and the Supreme Court have expressly deemed to extend beyond the Sherman Act.”[11]

A recent speech by Commissioner McSweeny noted that in the U.S., as elsewhere, a large number of patents are often held by entities that neither practice the patent, nor produce, manufacture or sell goods.[12] She further noted than among this group of patent assertion entities (PAEs), there is a segment that seeks to monetize patents through nuisance litigation.[13] Indeed, this segment accounts for 96 percent of patent infringement cases, but only 20 percent of reported licensing revenue.[14] McSweeny draws the conclusion that the value of this segment to innovation (and presumably competition and consumer welfare) is “relatively low.”[15] As with other FTC publications on the topic, she noted that the pro-competitive benefits of standard-setting organizations are thwarted by the issue of patent hold-up, and she also identified the negative impact on competition as an antitrust issue.[16] She specifically highlighted the disincentive on innovation brought about by abuse of SEP licensing, and she cited two instances where abusive SEP royalty rates were challenged in the courts and held to be 150 and 500 times the reasonable rate.[17]

In January 2017, after more than two years of investigation, the FTC filed a complaint against Qualcomm for abuse of its SEP position in mobile telephony.[18] The FTC’s complaint alleges that such conduct has led to higher prices for the sale of chips by Qualcomm’s competitors because Qualcomm charges its customers a royalty on all mobile telephony chips regardless of origin.[19] In other words, handset manufacturers pay the SEP royalty regardless of whether they use a Qualcomm chip or the chip of Qualcomm’s competitors. Under Qualcomm’s “no license – no chips” policy, it refuses to sell the chips to any handset manufacture refusing to pay royalties on all chips.[20] Additionally, the FTC alleges that, despite having committed to the standard-setting organization that it was willing to license its SEPs to competitors, Qualcomm has refused to do so.[21]

The FTC alleges that its conduct has perpetuated its monopoly position by dis-incentivizing handset manufacturers to purchase competing chips (since they pay the Qualcomm royalty regardless) and by preventing competitors from entering the market.[22] Further, the FTC has stated that handset manufacturers pay more to license Qualcomm SEPs than they pay for other mobile telephony SEP licenses, increasing the cost of mobile handsets to consumers.[23] Because handset manufacturers are locked-in to the standard and Qualcomm has a monopoly on chips, handset manufacturers have little recourse.[24] The FTC claims that this conduct violates Section 5, which prohibits unfair methods of competition and unfair or deceptive acts or practices.[25]

The Potential Pendulum Shift

This only describes the view of half the current commission. With an administrative sea change underway, future interventions by the FTC could be limited, especially if one looks to Acting Chair Ohlhausen as a litmus test.

In several recent statements[26], Ohlhausen has made it clear that, when it comes to abusive SEP practices, she opposes antitrust intervention. Her remarks relating to the FTC’s decision to sue Qualcomm are illustrative.[27] She characterized the FTC’s decision to sue Qualcomm as “lack[ing] economic and evidentiary support.”[28] The “core theory” of the case, she said, was that Qualcomm abused its chipset “monopoly” to obtain “unreasonably high royalties” for its patent portfolio, arguing that the theory was at best just a possibility.[29] She also described Qualcomm’s conduct as lacking any claim of anticompetitive effect.[30] She further implied that if the above conduct did not amount to a Sherman Act claim, then the FTC cannot bring a “standalone” Section 5 claim.[31]

This should come as no surprise to regular observers of the FTC. Ohlhausen has for some time espoused a hands-off approach when it comes to SEP licensing and royalties. In her recent remarks at the Heritage Foundation, she praised the FTC/DOJ Joint Guidelines for the Licensing of Intellectual Property for omitting any discussion of the issue.[32] And she characterized recent FTC actions in the space as “regrettable antitrust interventions.”[33] She further characterized the FTC decisions in Google-MMI and Robert Bosch as “wrong on their merits.”[34]

The Bottom Line

Ohlhausen has signaled a clear distaste for intervention in the SEP space. McSweeny has indicated a preference for intervention. With only two commissioners at the table, it is unlikely the impasse will be overcome. Moreover, with the addition of more commissioners (we expect one more Democrat and two Republicans), it seems that if each follows party lines, intervention is unlikely to continue.[35]

Interestingly, that leaves the U.S. as an outlier in the global debate about how to deal with abuses by SEP holders. Other jurisdictions, including Korea, Japan, Canada, China and the EU, have been taking an interventionist approach, reasoning that abusing an SEP position harms consumers.[36] This raises one more question: Will the U.S. will be able to influence policy regarding the prosecution of SEP holders that abuse their positions when the abuse may be global in nature?

[1] SEP abuses are often characterized at the intersection of IP and antitrust because there are policy concerns both regarding the rights of patent holders to act unfettered and the effect on competition that derives from an abuse of those rights. I suggest that consumer protection concerns also arise. And other commentators have raised contract law concerns.

[2] Even critics of the use of the “antitrust laws” – which term may not include Section 5 of the FTC Act, see discussion below at note 35 – admit that “consumer welfare is undoubtedly at stake when a SEP holder refuses to license under FRAND terms.” Ginsburg, Owings & Wright, Enjoining Injunctions: The Case Against Antitrust Liability for Standard Essential Patent Holders Who Seek Injunctions, Antitrust Source (October 2014). Indeed, it is beyond argument that entities collecting patents are more likely to assert poor quality patents for monetary gain and often seek only nuisance value in compensation.

[18] A similar, but much more detailed, complaint was also filed by Apple in January 2017 against Qualcomm, making essentially the same claims. Complaint, Apple, Inc. v. Qualcomm Inc., No. 17CV0108GPCNLS (S.D.Cal.).

[26] Remarks of Comm. Ohlhausen, Antitrust Policy for a New Administration, The Heritage Foundation, Jan. 24, 2017 (“Heritage Remarks”); Dissenting Statement of Comm. Ohlhausen, In the Matter of Qualcomm, Inc., File No. 141-0199, Jan. 17, 2017 (Qualcomm Dissent). Although, her position on the topic has been consistent over time.

[27] The case was filed on January 17, 2017, but the FTC had been investigating Qualcomm and the conduct alleged in the complaint for more than two years.

[31]Id. In the US, there has been considerable debate as to the scope and purpose of Section 5 of the FTC Act. On one side of the debate is the argument that the statute should go no further than Section 1 or 2 of the Sherman Act. The other side of the debate raises the rebuttal question: then why have the statute at all? The FTC has used the statute in various cases over the years, most recently to prosecute invitations to collude, which fall short of the agreement requirement for a Sherman Act Section 1 claim.

[33]Id. This is an interesting position as a policy matter given that Acting Chair Ohlhausen admits in her article in the Harvard Law Journal that many of the patents being asserted by Patent Assert Entities and the likes of Qualcomm “would not have been asserted but-for their accumulation, their licensees independently invented the claimed technologies, or that their IPR holdings are of poor quality.” Hon. M. Ohlhausen, Patent Rights In A Climate Of Intellectual Property Rights Skepticism, 30 Harvard Law Journal 1 (Fall 2016).

[35] Former FTC (and Republican) Commissioner Joshua Wright, who has been involved in the transition from the Obama to Trump administrations, has advocated with others that the antitrust laws are not the proper means to address the SEP hold-out issue. See, e.g., Ginsburg, Wong-Ervin & Wright, The Troubling Use of Antitrust to Regulate FRAND Licensing, CPI Antitrust Chronicle (October 2015) (CPI Article). However, in most of their writings, those authors fail to define whether they include Section 5 of the FTC Act in their definition of “antitrust laws.” Given their reference to the antitrust laws imposing treble damages, which are not available under Section 5, one could conclude that they do not mean Section 5 when they make their case against using the antitrust laws to address the SEP hold-up issue.

Timothy Cornell is a partner at Clifford Chance and heads the firm’s U.S. antitrust practice. He advises clients on antitrust issues in government civil and criminal investigations, the regulatory review of mergers and acquisitions and more. He is based in the firm’s office in Washington, D.C. He can be reached at Timothy.Cornell@CliffordChance.com.